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Rational Expectations and Policy Credibility Following a Regime Change

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  • David Backus
  • John Driffill

Abstract

We examine the economy after a regime change, when neither the policy nor the reactions of the public are known. This is an application of Kreps and Wilson's reputation model to Barro and Gordon's macroeconomic policy game. Equilibrium is defined as the dynamically consistent solution to a game between the government and the private sector. It involves mixed strategies and Bayesian learning on both sides. The absence of complete credibility and intransigence of private sector wage demands increase the output loss of disinflation.

Suggested Citation

  • David Backus & John Driffill, 1984. "Rational Expectations and Policy Credibility Following a Regime Change," Working Papers 564, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:564
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    Cited by:

    1. Fazio, Dimas Mateus & Silva, Thiago Christiano & Tabak, Benjamin Miranda & Cajueiro, Daniel Oliveira, 2018. "Inflation targeting and financial stability: Does the quality of institutions matter?," Economic Modelling, Elsevier, vol. 71(C), pages 1-15.
    2. Hughes Hallett Andrew & Acocella Nicola & Di Bartolomeo Giovanni, 2012. "Expectations Dynamics: Policy, Announcements and Limits to Dynamic Inconsistency," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(2), pages 1-25, April.

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